on Nov. 1, as requested, the actual agreement wasn't executed
until late November. I was also surprised to learn that the service
fee paid to DiscoCare was to be classified as a marketing expense
rather than a discount, and that Price Waterhouse Coopers (PwC),
ArthroCare's outside auditing firm, had signed off on this treat-
ment.
It's important to note that revenue recognition rules changed a num-
ber of times from late 2006 throughout 2007, and I was told that PwC
signed off on each of these changes. By the middle of 2007,
ArthroCare had moved to a revenue recognition model where it
recorded revenue when a case was entered into a case tracker system
and it shipped a SpineWand to DiscoCare for the case. This increased
the already very long lag time between when revenue on the
SpineWand sale was recognized and when DiscoCare collected from
the payer.
The business through DiscoCare grew strongly in 2007, both on a
revenue basis and in terms of cases completed. DiscoCare continued
to collect on a very high percentage of cases. However, this growth
still fell short of the quota for a couple of quarters. As we had learned
in 2006, implementing this business model in new markets took much
longer than expected and much of our sales force didn't have what it
took for success.
Because of the lag between when ArthroCare booked the sale and
when DiscoCare collected on the case — and the long dating
DiscoCare had on orders — the amount of money that DiscoCare
owed to ArthroCare grew exponentially. The irony is that the more
successful our sales force was in scheduling cases, the higher the
accounts receivable balance grew. This became a significant problem
because the company had elected not to disclose to investors the
national agreement with DiscoCare, or that DiscoCare accounted for
6 9
A U G U S T 2 0 1 5 | O U T P A T I E N TS U R G E R Y. N E T
